"Neither I nor my family have ever been in trouble with the police. They burst into my home and arrested me for breaking into a car and stealing things and using blackmail.

"I couldn't believe what was happening."

Her ordeal began on July 27 when she found a briefcase, documents from Manchester probation service, keys and a purse in an alley near her home in Genista Close, Walton.

She spent three hours arranging to return the belongings - including court documents with personal details, confidential information and probation service reports - to their rightful owner and even tried to hand them in at Walton Lane police station that evening, without success.

The next day she was arrested on suspicion of theft from a vehicle outside Risley remand centre, near Warrington, and blackmail.

She was taken to a police station in Bootle and searched, spent hours in a cell and had to give a formal statement.

She was eventually allowed home, providing she went to Warrington police station the next day.

There, a Cheshire police detective apologised and admitted Miss Smith should not have been arrested.

Now Miss Smith, who works as a postal sorter, is suing the police for unlawful arrest and false imprisonment.

Solicitor Zoe Taxman said: "Our client was arrested in circumstances that have become an embarrassment for the police after they admitted there had been a terrible misunderstanding.

"This case involved an innocent woman trying to help the police and probation service who was subsequently arrested."

Merseyside police officers arrested her at the request of Cheshire police.

A Cheshire police spokesman saidtoday : "We were notified by the probation service that a bag containing confidential documents, stolen from a vehicle, were in the possession of an individual. They reported that the individual appeared reluctant to hand over the bag and file unless a reward was paid.

"A 40-year-old woman was arrested on suspicion of theft."

The Probation Service declined to comment.

Miss Smith denied that she asked for a reward.

"It is absolutely untrue," she said. "I went to the police station to try and hand them in. I do not know why I have been accused of that."